Fixed vs Variable Home Loans
The rate debate: fixed vs. variable rate home loans
Home loans generally have either a fixed or variable interest rate, or a split rate - a mixture of both. A fixed rate home loan is taken out for a set period with a set interest rate; when this period ends you can fix the rate again, or switch to a variable interest rate which fluctuates with the market.
Variable and fixed rate loans are more or less appropriate in different financial environments, and for different types of lender.
Fixed rate home loans
Fixed home loans have traditionally been associated with rigid conditions, but with flexible new products available, and interest rates relatively low, fixed rate loans are currently quite popular in Australia (though not as popular as standard variable rate loans). The majority of fixed rate home loans allow extra repayments and include redraw facilities.
A fixed rate home loan can be good if you want to carefully budget your repayment - knowing exactly how much you need to repay means you can plan accordingly and gives you a degree of certainty and security.
However, some fixed rate loans still charge you for making early repayments, which means that if your financial situation becomes more positive you will often have to either pay a fee, or keep the loan for the original term and pay the full interest amount.
If choosing a fixed rate loan, you also need to consider fairly carefully the term of the loan – usually between one and five years, but sometimes up to ten. The most popular fixed-rate loan term is three years - which seems to allow borrowers a sense of security with a certain degree of flexibility, but the choice of loan term needs to suit your specific situation.
Variable rate home loans
Variable home loans usually provide options and flexibility, but they can also be risky in a rising interest rate market if you’ve overcapitalised on your loan. The important thing to do when taking out a variable rate loan is to plan and budget for hikes in interest rates, and make sure that you’re able to meet your repayment obligations should rates rise.
Variable rate loans can include a range of extra features, and some loan products have low introductory, or “honeymoon” rates for an initial period before reverting to the standard rate. (More about home loan types.)
Choosing the loan that’s right for you
A Prestige Group Mortgage Consultant will assist you to select the product that best suits your circumstances.